UPDATE 2-Minnesota government shutdown begins after talks fail

(Adds comment from bond rating agency)

By David Bailey

MINNEAPOLIS, July 1 Minnesota's state
government began a broad shutdown on Friday going into the July
4 holiday weekend after the Democratic governor and Republican
legislative leaders failed to agree on a budget.

The impasse means around 23,000 of roughly 36,000 state
employees will be furloughed, and all but the most critical
state functions suspended. Parts of the government had already
begun to shut down on Thursday ahead of the midnight deadline.

State parks and campgrounds have closed ahead of what is
usually their busiest stretch of the year for the July 4
holiday, and dozens of highway rest stops were shut down for
one of the biggest travel days of the year.

As with tensions across state governments from Wisconsin to
Ohio, the shutdown had its origins in elections last November,
when Minnesota voters elected the state's first Democratic
governor in 20 years and Republican majorities in the House and
Senate that were not big enough to override his vetoes.

"This is a night of deep sorrow for me because I don't want
to see this shutdown occur," Governor Mark Dayton told
reporters on Thursday night.

Dayton and the Republican-led Legislature have been far
apart in their public positions over a two-year budget plan to
close a $5 billion deficit. Only the agricultural budget was
approved during the legislative session that ended in May.

Dayton vetoed the other spending proposals. He also vetoed
Republican-backed bills to restrict abortions after 20 weeks of
pregnancy and require voters to present photo identification at
the polls similar to Republican efforts across the country.

Dayton said his last proposed two-year general fund budget
was $35.7 billion, but the differences between his approach and
the Republican leaders had not changed since January. The gap
between the two sides stood at $1.4 billion, he said.

Republican leaders had asked Dayton to call a special
session to approve a 10-day funding extension, saying they
believed they were close to a budget deal. Dayton dismissed the
offer as "a publicity stunt."

Senate Majority Leader Amy Koch said in a statement she was
troubled by Dayton's rejection of the temporary funding bill.

"We will continue working on a solution to the state budget
deficit when the time is appropriate," she said.

POLICE PATROLS SPARED, ZOO CLOSED

Dayton's first budget proposal included an income tax
increase on the wealthiest state residents and an expansion in
overall spending. Republican leaders first sought some tax
cutbacks in aiming to halt spending increases.

In the latest talks, Republicans offered to raise $1
billion by shifting payments to schools and issuing bonds for
tobacco settlement money. Dayton offered to limit his tax hike
to those earning over $1 million a year. Neither offer stuck.

"Tax revenues are still, in my view, the fairest way to
resolve this, but we have offered an awful lot of different
possibilities, and they have, too," Dayton said.

All but the most critical state functions will be suspended
while the impasse continues into the new fiscal two-year period
that started on Friday, making the 2011 shutdown much broader
in scope than one in 2005.

Neither Dayton nor the Republican leaders gave any
indication when they would meet next to discuss the budget.

Prison staffing, state police patrols and staffing at
nursing and veterans homes were among services found critical
and allowed to continue by a Ramsey County judge. Staffing at
numerous other departments will be cut to the bare bones.

Other functions deemed critical include the executive and
legislative branches of state government and the courts.

Payments to schools and local governments, and programs
such as food stamps, Medicaid and temporary assistance to needy
families will also continue during the shutdown.

However, numerous other programs not considered critical
will be closed, including the state lottery, the gambling
control board and the racing commission.

Standard & Poor's Ratings Services said on Friday the
shutdown would have no immediate impact on Minnesota's triple-A
bond rating, noting that a court order that expires on July 31
continued funding for debt service payments.

"If the shutdown persists and there is an inability to
reach consensus on the fiscal 2012 budget and progress toward
structural budget balance is threatened, there could be credit
implications," S&P said.

The shutdown forced Canterbury Park horse racing track to
suspend gaming operations and begin laying off "substantially
all" of its 1,100 full- and part-time workers, it said on
Friday. The park will lose more than $1 million of gaming and
concession revenue each week during the shutdown, it said.

Driver's licenses, and fishing and hunting licenses, will
not be issued, but residents may be able to renew car license
plate tabs at non-state operations.

The Minnesota Zoo would also close to the public with
spending permitted only to feed and care for the animals.

Among popular Minnesota spots, vacationers may stay at the
privately run villa and lodge operations at Giants Ridge golf
resort, but its lauded golf courses will be closed.
(Additional reporting by Karen Pierog in Chicago; Editing by
Greg McCune, Jerry Norton, Cynthia Johnston and Jan Paschal)

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